Japan DPJ may add conditions to sales tax hike timing

* Lawmakers worried about tax impact on post-quake recovery

* Policy outlook made murky by political wrangling (Recasts, adds quotes)

By Chisa Fujioka

TOKYO, June 21 (Reuters) - Japan's ruling party wants to attach conditions to a proposed sales tax hike, a key tax panel official said, a change of stance that analysts say could risk diluting the government's fiscal reform message to worried financial markets.

On Monday, the ruling party's tax and social security panel refused to sign off on government reforms including a doubling of the 5 percent sales tax by the year starting in April 2015 after lawmakers voiced worries about the impact on the economy.

"Everyone said the conditions should be discussed further," Sakihito Ozawa, the No. 2 official of the Democratic Party of Japan panel, told Reuters in an interview on Tuesday.

"Some said nominal growth should be positive, some said the consumer price index should be a factor. The party won't be satisfied until details are worked out," he said.

The panel aims to reach agreement on a plan by the end of the month.

Tax and welfare reforms, considered essential to get Japan's ballooning debt under control, have become signature policies of Prime Minister Naoto Kan. But Kan now looks set to quit although he has not said when.

Kan has struggled to win unified support from his party and has yet to secure the necessary backing of a hostile opposition, which is using its ability to block bills in the parliament's upper house.

Japan is slowly recovering from the deadly March 11 earthquake and tsunami that ravaged much of the northeast coast and triggered a nuclear crisis, but some data indicate the turnaround will be anything but smooth.

Ozawa, who has signalled his interest in running to replace Kan, also said he was against tax hikes to fund the costs of rebuilding after the quake and tsunami, saying that reconstruction should instead be funded by government bonds.

Tax increases, though, are seen inevitable to fund growing costs to care for an ageing population at a time when public debt is already twice the size of the ${esc.dollar}5 trillion economy, the worst among industrial countries.

But analysts said that by setting conditions for tax hikes, Japan would risk sending the message to financial markets that it was weakening its push for fiscal reform.

"If you set too many conditions, even if the plan says the sales tax increase should be raised to 10 percent by 2015, it risks having no meaning," said Kazuhiko Nishizawa, senior economist at Japan Research Institute. (Additional reporting by Sumio Ito and Risa Maeda; Editing by Edwina Gibbs)